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March 21, 2013

Jeremy Siegel’s Math Puts Dow at 18,000 Next Year: Epstein

Barron’s writer has the Wharton prof’s math on his side when he gives 50-50 odds for reaching this milestone in 2014

Trader wears hat touting Dow’s 1999 milestone. (Photo: AP)

We’re used to grandiose predictions for the Dow that never quite seem to pan out (see Jim Glassman’s Dow 36,000, Harry Dent’s Dow 40,000 or even Charles Kadlec's Dow 100,000). But when they come from someone like Jeremy Siegel and are credibly within reach, it might be worth a look.

Gene Epstein of Barron’s takes a look at the hard numbers and makes a strong case for reaching the milestone. He also cites Siegel, famed finance professor at the University of Pennsylvania's Wharton School, in his calculations.

“Even with the Dow reaching a record 14,539.14 …the performance of the market over the past five years is still below par,” Epstein argues. “That bodes well for the bulls. Lower-than-average returns over five years are generally followed by higher-than-average returns over the following two years.”

Accordingly, he claims the Dow has a four-in-five chance to be “flat or higher by year-end 2014, and a 50-50 chance of approaching 18,000 over the same time frame.”

"These market odds are derived from long-term market patterns whose source is Siegel," he notes. Siegel has amassed numbers on stock-market performance dating back to 1871, the earliest year for which “unimpeachable data” are available. The numbers, which were compiled with the help of Prof. Siegel's former student Jeremy Schwartz, provide the basis for projecting the likely path of the Dow.

“The 142 years of market performance reveal a fairly straightforward cyclical pattern of worse-than-average returns followed by periods of better-than-average returns. Last year, the five-year returns were in the lowest quartile of all returns for five-year cycles.”